In 1954, widower U.S. Marshal Edward “Teddy” Daniels and his new partner Chuck Aule go on a ferry boat to Shutter Island, the home of Ashecliffe Hospital for the criminally insane, to investigate the disappearance of a patient Rachel Solando. She has escaped the hospital and apparently the desolate island despite being kept in a locked cell under constant supervision.

In Rachel’s room, Teddy and Chuck discover a code that Teddy believes points to a 67th patient, when records show only 66. Teddy also reveals that he wants to avenge the death of his wife Dolores, who was murdered two years prior by one of the inmates, Andrew Laeddis. The novel is interspersed with graphic descriptions of World War II and Dachau which Teddy helped to liberate. After Hurricane Carol hits the island, Teddy and Chuck investigate Ward C, where Teddy believes government experiments with psychotropic drugs are being conducted. One inmate tells Teddy that Chuck is not to be trusted.

As Teddy and Chuck return to the main hospital area, they are separated. Teddy discovers a former psychiatrist, who says she is the real Rachel Solando, hiding in sea caves. She warns him about the other residents of the island, telling him to take care with the food, medication and cigarettes, which have been laced with psychotropic drugs. When Teddy returns to the hospital, he cannot find Chuck and is told he had no partner. He escapes and tries to rescue Chuck at the lighthouse where he believes the experiments take place. He reaches the top of the lighthouse and finds only hospital administrator Dr. Cawley seated at a desk. Cawley tells Teddy that he is in fact Andrew Laeddis (an anagram of Edward Daniels) and that he has been a patient at Shutter Island for two years for murdering his wife, Dolores Chanal (an anagram of Rachel Solando), after she murdered their three children.

Andrew/Teddy refuses to believe this and takes extreme measures to disprove it, grabbing what he thinks is his gun and tries to shoot Dr. Cawley; but the weapon is a toy water pistol. Chuck then enters, revealing that he is actually Andrew’s psychiatrist, Dr. Lester Sheehan. He is told that Dr. Cawley and Chuck/Sheehan have devised this treatment to allow him to live out his elaborate fantasy, in order to confront the truth, or else undergo a radical lobotomy treatment. Teddy/Andrew finally realizes that he killed his wife and his service as a US Marshal was a long time ago.

The ending of the novel is unclear as to which “reality” is true: the recovery or the investigation. It is also unclear whether Teddy has truly regressed, or if he wishes to “die” (at the very least, lose his ability for conscious thought, through lobotomy) in order to avoid living with the knowledge that his wife murdered their children and he is her murderer.